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1、Interest Rates and Bond ValuationChapter 66.1Key Concepts and SkillsnKnow the important bond features and bond typesnUnderstand bond values and why they fluctuatenUnderstand bond ratings and what they meannUnderstand the impact of inflation on interest ratesnUnderstand the term structure of interest
2、 rates and the determinants of bond yields6.2Chapter OutlinenBonds and Bond ValuationnMore on Bond FeaturesnBond RatingsnSome Different Types of BondsnBond MarketsnInflation and Interest RatesnDeterminants of Bond Yields6.3Bond DefinitionsnBondnPar value(face value)nCoupon ratenCoupon paymentnMaturi
3、ty datenYield or Yield to maturity6.4PV of Cash Flows as Rates ChangenBond Value=PV of coupons+PV of parnBond Value=PV annuity+PV of lump sumnRemember,as interest rates increase the PVs decreasenSo,as interest rates increase,bond prices decrease and vice versa6.5Valuing a Discount Bond with Annual C
4、ouponsnConsider a bond with a coupon rate of 10%and coupons paid annually.The par value is$1000 and the bond has 5 years to maturity.The yield to maturity is 11%.What is the value of the bond?nUsing the formula:nB=PV of annuity+PV of lump sumnB=1001 1/(1.11)5/.11+1000/(1.11)5nB=369.59+593.45=963.04n
5、Using the calculator:nN=5;I/Y=11;PMT=100;FV=1000nCPT PV=-963.046.6Valuing a Premium Bond with Annual CouponsnSuppose you are looking at a bond that has a 10%annual coupon and a face value of$1000.There are 20 years to maturity and the yield to maturity is 8%.What is the price of this bond?nUsing the
6、 formula:nB=PV of annuity+PV of lump sumnB=1001 1/(1.08)20/.08+1000/(1.08)20nB=981.81+214.55=1196.36nUsing the calculator:nN=20;I/Y=8;PMT=100;FV=1000nCPT PV=-1196.366.7Graphical Relationship Between Price and YTM6.8Bond Prices:Relationship Between Coupon and YieldnIf YTM=coupon rate,then par value=b
7、ond pricenIf YTM coupon rate,then par value bond pricenWhy?nSelling at a discount,called a discount bondnIf YTM coupon rate,then par value bond pricenWhy?nSelling at a premium,called a premium bond6.9The Bond-Pricing Equationttr)(1Frr)(11-1C Value Bond6.10Example 6.1nFind present values based on the
8、 payment periodnHow many coupon payments are there?nWhat is the semiannual coupon payment?nWhat is the semiannual yield?nB=701 1/(1.08)14/.08+1000/(1.08)14=917.56nOr PMT=70;N=14;I/Y=8;FV=1000;CPT PV=-917.566.11Interest Rate RisknPrice RisknChange in price due to changes in interest ratesnLong-term b
9、onds have more price risk than short-term bondsnReinvestment Rate RisknUncertainty concerning rates at which cash flows can be reinvestednShort-term bonds have more reinvestment rate risk than long-term bonds6.12Figure 6.26.13Computing YTMnYield-to-maturity is the rate implied by the current bond pr
10、icenFinding the YTM requires trial and error if you do not have a financial calculator and is similar to the process for finding r with an annuitynIf you have a financial calculator,enter N,PV,PMT and FV,remembering the sign convention(PMT and FV need to have the same sign,PV the opposite sign)6.14Y
11、TM with Annual CouponsnConsider a bond with a 10%annual coupon rate,15 years to maturity and a par value of$1000.The current price is$928.09.nWill the yield be more or less than 10%?nN=15;PV=-928.09;FV=1000;PMT=100nCPT I/Y=11%6.15YTM with Semiannual CouponsnSuppose a bond with a 10%coupon rate and s
12、emiannual coupons,has a face value of$1000,20 years to maturity and is selling for$1197.93.nIs the YTM more or less than 10%?nWhat is the semiannual coupon payment?nHow many periods are there?nN=40;PV=-1197.93;PMT=50;FV=1000;CPT I/Y=4%(Is this the YTM?)nYTM=4%*2=8%6.16Table 6.16.17Spreadsheet Strate
13、giesnThere is a specific formula for finding bond prices on a spreadsheetnPRICE(Settlement,Maturity,Rate,Yld,Redemption,Frequency,Basis)nYIELD(Settlement,Maturity,Rate,Pr,Redemption,Frequency,Basis)nSettlement and maturity need to be actual datesnThe redemption and Pr need to given as%of par valuenC
14、lick on the Excel icon for an example6.18Differences Between Debt and EquitynDebtnNot an ownership interestnCreditors do not have voting rightsnInterest is considered a cost of doing business and is tax deductiblenCreditors have legal recourse if interest or principal payments are missednExcess debt
15、 can lead to financial distress and bankruptcynEquitynOwnership interestnCommon stockholders vote for the board of directors and other issuesnDividends are not considered a cost of doing business and are not tax deductiblenDividends are not a liability of the firm and stockholders have no legal reco
16、urse if dividends are not paidnAn all equity firm can not go bankrupt6.19The Bond IndenturenContract between the company and the bondholders and includesnThe basic terms of the bondsnThe total amount of bonds issuednA description of property used as security,if applicablenSinking fund provisionsnCall provisionsnDetails of protective covenants6.20Bond ClassificationsnRegistered vs.Bearer FormsnSecuritynCollateral secured by financial securitiesnMortgage secured by real property,normally land or b
